How to Trade the Pullback in Oil Prices

Oil prices are dropping.

Last checked, crude was down $4.50 to $105.30. That’s happening for a few reasons.

One, “According to AAA, the drop in oil and gasoline futures prices stemmed from traders’ concerns about an overall drop in U.S. economic activity following the Federal Reserve Board’s three-quarters-of-a-percentage point increase in benchmark interest rates on June 15 — the most aggressive hike since 1994,” as noted by the AZDailySun.com.

Two, we’re already seeing a good deal of demand destruction. In fact, according to the EIA, gasoline demand over the last 4 weeks is about 2.0% less than this time last year. As prices continue to rise, I expect that the demand will continue to fall off compared to 2021,” Andy Lipow of Lipow Oil Associates told Yahoo Finance.

Three, OPEC is boosting output by another 648,000 barrels in August, which matches its July increase. This was widely anticipated.

Unfortunately, no one is quite sure what happens next with oil.

Should oil prices drop even more, keep an eye on DUG and SCO.

With oil dropping, the DUG ETF ran from a low of about $15 to $22.18. Should we see oil pull back to $100 and below, the DUG ETF could see $27.50 near-term. With an expense ratio of 1.32%, the ETF seeks a return of -2x the return of its index for a single day. Its holdings include DJ U.S. Oil and Gas Index swaps.

Or, look at ProShares UltraShort Bloomberg Crude Oil (SCO).

With oil turning lower, the SCO ran from a recent low of $18.03 to $22.80. With an expense ratio of 0.95%, SCO seeks a return of -2x the return of its index for a single day. Some of its holdings include WTI Crude Futures.